Using Game Theory

This lecture explains why we can exploit game theory to increase our understanding of bargaining.

Takeaway Points

The standard way people learn bargaining—through anecdotes—makes it difficult to understand the sources of bargaining power.

It is even more difficult to make strong conclusions when there multiple issues potentially affecting bargaining. For example, perhaps a person succeeded in bargaining when they employed x, y, and z. But maybe x did all of the heavy lifting, y did nothing, and z hurt. Then, despite the good outcome, the individual could have performed even better.

Game theory was developed in the 1950s to study situations that involve strategic interdependence—that is, any circumstance where what I want to depends on what you will do, and what you want to do depends on what I will do.

Game theory allows us to study such strategic scenarios in a vacuum. We can check whether x truly provides bargaining power by solving models with and without x and then seeing how the results differ.